Despite the gloomy economic situation worldwide, the G20 meeting in Cairns, which brought together the block's financial chiefs and top bankers, gives us reason to hope for a sustainable growth rate, write Geethanjali Nataraj and Richa Sekhani
When world leaders meet for the G20 summit next month, they will have to deal with a global economy that is facing uneven growth, with weakening demand and supply constraints. Geo-political tensions will also add to their worries. Through much of this year, the global economy has faltered — Europe has shown signs of slipping into deflation, Japan’s recovery has been numb, and China’s growth target of 7.5 per cent is unlikely to be met.
In a recent report, the Organisation for Economic Cooperation and Development has also trimmed the growth prospects of some of the world’s biggest developed economies. The US is now likely to grow only at 2.1 per cent instead of 2.6 per cent while the Eurozone is expected to grow at 0.8 per cent down from the May prediction of 1.2 per cent. The growth prospects of the G20 block has also slipped from 3.4 per cent in the first quarter of this year to 3.25 per cent in the second quarter.
Nevertheless, despite gloomy situation globally, the recently-held G20 meeting in Cairns, Australia, which brought together the block’s financial chief, ministers and top bankers, gives us some reason for hope. The leaders discussed the G20’s commitment to a 1.8 per cent world Gross Domestic Product growth target (presently at 1.6 per cent). This will boost the world economy by two trillion dollars by 2018.
Amidst the challenges, the meeting welcomed stronger economic conditions that would help put in place right policies which in turn will facilitate growth in all G20 economies. Although around 900 initiatives were put forward, Australian Treasurer Joe Hockey suggested incorporating larger structural reforms to achieve the target, while leveraging fiscal and monetary policies where appropriate.
Similar meetings held in Sydney focussed on measures to address the risks and on figuring out the appropriate policies that would enhance economic growth. In the lead up to the Brisbane Summit in November, there will be a series of such meetings wherein efforts will be made to identify additional steps to meet the growth target. These measures will lead to re-balancing global demand and its implementation will also foster private sector growth.
While Canada’s Finance Minister Joe Oliver urged Europe to bolster demand by emphasising more on fiscal measures for G20 economies, financial chiefs advised changes in the composition and quality of Government expenditure and tax to enhance the contribution of fiscal strategies to growth.
For this, a global Common Reporting Standard for automatic exchange of tax information on a reciprocal basis was finalised. This will add to the modernisation of the global tax regime and close gaps that have emerged in recent years. Around 3,000, bilateral tax agreements will have to be amended and made technically feasible. It remains to be seen if these can be achieved within a reasonable time period.
The meeting also emphasised on improving the investment climate investing in new infrastructure projects. This will also encourage private sector participation.
Moreover, the initiative by the World Bank to develop the Global Infrastructure Facility will provide a platform for collaboration between development banks and the private sector. This will ensure that the emerging economies direct their efforts towards quality infrastructure investments.
To foster a stronger and more resilient financial system, increased consistency in the application of strengthened Basel III rules — a global, voluntary regulatory standard — on capital has also been planned. Efforts are already in place to strengthen capital requirements for global banks. Terms and conditions are also being re-defined to protect taxpayers in case there is a bank failure. Hopefully, the Brisbane Summit will deliver the remaining core elements of the shadow banking framework and update the roadmap which was agreed to in 2013.
However, almost all the G20 nations have failed in one regard — they have not been able to effectively share and communicate their developmental agendas with their citizens. Additionally, the G20 Governments need to enhance the role of the public in tackling internal issues such as unemployment. The sooner it happens, the more likely the results will be seen.
However, several challenges and threats may prevent the world from achieving two per cent annual growth rate. For instance, the International Monetary Fund plans to raise the interest rate, which in turn can stonewall plans to achieve the target. Also, global investment is witnessing lower volatility. As Canada’s Finance Minister Joe Oliver said: “What we are looking at here is an apparent search for return in a low-yield environment, and the concern is that we are seeing more investing in higher risk ventures”. As a result of this, a sudden re-appraisal will increase volatility. This, in turn, will cause huge losses.
Moreover, the risks from shadow banking are making the investors complacent about financial markets. Adding to this already worrisome situation are the geo-political risks. Also, faltering demand from the world’s bigger economies is another area of concern. This has already impacted the major financial markets of Asia, Europe and the US, even though monetary stimulus has been offered by the Federal Reserve Bank, the Japanese Bank and the European Central Bank.
Although G20 is well on its way towards meeting its growth target, additional growth will require additional policy measures. Sure, the Cairns meeting had much substance. However, words are yet to be turned into action. How far the G20 will be able to change the fortune of the global economy and to what extent the grouping will manage to take all required actions will be known only after the Brisbane Summit in November. Till then, the world waits with baited breath.
(The authors are researchers with the Observer Research Foundation in New Delhi)